December 2000 Fraser Forum:
Government's Secret Taxes
Is big government no longer fashionable in Canada? So it would seem. Ottawa and seven of the provinces have balanced their budgets and are working on debt reduction. Tax cuts featured prominently in the election campaigns of both the Canadian Alliance and the Liberal parties.
This is a far cry from where Canada was a decade ago when the federal government had not balanced its budget in over 20 years, all of the provinces were running huge budget deficits, and our tax burden was high even by international standards.
A substantial amount of the credit for the turnaround belongs to the electorate, who expressed concern about their governments’ fiscal recklessness. But it would be a mistake to think that Canadians have their governments under control. Government reaches into our wallets in another way, and it does so with virtually no accountability. This intrusion is more insidious than taxation, because it is often viewed as entirely benign or beneficial: regulation.
Regulation, broadly speaking, is the government’s attempt to make rules for others to follow through legislative or administrative action. Regulations are often designed to attain worthy goals such as cleaner air, equal employment opportunity, safer work environments, and product safety. Regulatory costs are easily hidden because only a small fraction of costs—the costs of administering the regulations—actually appear in government budgets. Other costs are passed on to businesses and consumers—those who must comply with the rules. Not surprisingly, governments are in no hurry to disclose these costs. But academics have estimated that the burden of complying with regulations is between 17 and 20 times what governments spend to administer them. What does this mean to the average Canadian? Regulation is estimated to cost every family of four over $11,000 annually. This is only slightly lower than the income-tax burden of $11,247 levied on a family of four with a $50,000 income.
We can expect this load to increase. First, since deficit spending is out of favour and the public has no appetite for tax increases, regulation will likely be a tempting way for governments to accomplish their goals without substantially increasing spending. Racheting-up regulatory activity could easily erase any gains from fiscal restraint.
Second, while the public does not support higher taxes, in many cases they do show strong support for increases in regulation, particularly the big growth area of risk regulation. This includes regulation of new advances in biotechnology as well as regulation affecting the environment, transportation, food, and medicine.
Why aren’t we more critical of regulation? In part, our attitudes towards risk have changed. As we have become more affluent, our tolerance for the risks associated with such everyday activities as eating, travelling, and even breathing, continues to decrease. While this decreased tolerance for risk is not in and of itself undesirable, it has fuelled the demand for more regulation. This demand focuses on the perceived benefits of regulation—reducing the riskiness of the world we live in—without adequately considering the costs. And the costs go well beyond the direct costs of $11,000 per family each year.
Sometimes reducing one risk introduces other, more serious, risks. For example, in order to reduce the risk of cancer, a ban on the fungicide EDB was introduced in the mid-1980s. This apparently sensible regulation may, however, cause a fungus to remain on nuts and grains that may be more carcinogenic than the fungicide itself. Sometimes the unintended consequences can be dramatic: delaying regulatory approval of new life-saving drugs costs lives. Those who argue that these delays are justified because products should be proven absolutely safe before being introduced—the so-called "precautionary principle"—completely ignore these trade-offs.
Regulatory enthusiasts also tend to ignore the long-term effects of regulation, which stifle innovation, entrepreneurship, and technological change, and affect our productivity growth. Although these costs are difficult to measure, some studies suggest that escalating regulatory costs are responsible for between 12 and 31 percent of the substantial slow-down in productivity in industrialized countries since the mid-1970s. Since productivity growth represents an increase in wealth creation over and above the use of additional resources, a slow-down translates into higher unemployment, and a lower standard of living than we could otherwise have achieved.
During his term in office, Jean Chretien has recognized that productivity is a critical issue for Canada. In 1998 in a speech to the Canadian Chamber of Commerce in St. John’s, he said: "Our overriding objective will be to do whatever it takes to produce more jobs, higher incomes, and a higher standard of living for Canadians. To do that, we must enhance our productivity." Now, all Canadians need to recognize that it is not just taxes that affect productivity. Managing regulation as our tolerance for risk continues to decrease will be one of the most important challenges facing this nation over the next decade.
Like fiscal issues 10 years ago, the costs and benefits of regulation need a good public airing. Currently, we are failing to ask critical questions. Will a new regulation meet its goals? What are the costs? Is it the most cost-effective way of protecting the public? Will it have unintended consequences? Government regulation hits our wallets as surely as taxes do, yet there is shockingly little information available about its impact—short- or long-term. This is something our policy makers should address.
References
Douglass, Christopher, Michael Orlando and Melinda Warren (1997). Regulatory Changes and Trends: An Analysis of the 1998 Budget of the US Government. Policy Brief 182. St. Louis: Center for the Study of American Business.
Graham, John and Jonathan Wiener (ed). (1995). Risk vs. Risk: Tradeoffs in Protecting Health and the Environment. Cambridge, MA: Harvard University Press.
Mihlar, Fazil (1998). The Cost of Regulation in Canada. Vancouver: The Fraser Institute.
Regulatory Affairs (1996). Comparison of Federal Regulatory Spending and the Cost of Regulation: The USA Evidence. Ottawa: Treasury Board Secretariat.
Treff, Karen, and David Perry (1999). Finances of the Nation. Toronto: Canadian Tax Foundation.
Weidenbaum, Murray L. (1979). "The High Cost of Government Regulation." Challenge 22,5 (November-December): 32-39.
Wienert, Helgard. (1997). Regulation and Industrial Competitiveness: A Perspective for Regulatory Reform. Paris: OECD.
Laura Jones (lauraj@fraserinstitute.ca) is Director of Environment and Regulatory Studies at The Fraser Institute. She received her M.A. in Economics from Simon Fraser University. A version of this article first appeared in the National Post on November 20, 2000.
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